Economic Update

If Ben Bernanke is frustrated by the economy, as he seems to be, he might look at a recent issue of The Economist magazine. Editors there see enough strength that they saw fit to print an illustration of Uncle Sam as a bare-chested muscleman.

STEVE INSKEEP, HOST:

Let's talk about that and more with regular guests on this program, Zanny Minton Beddoes of The Economist. Welcome back to the program.

ZANNY MINTON BEDDOES: Nice to be here.

INSKEEP: And David Wessel of The Wall Street Journal. Hi, David.

DAVID WESSEL: Good morning.

INSKEEP: OK, amazing illustration, Zanny. But what were you thinking when you portrayed Uncle Sam that we way? What's going on that we're missing?

BEDDOES: Well, what we're trying to portray with that illustration is that the U.S. economy is, in some fairly fundamental sense, reinventing itself. This is not a story about the next three months or the next six months. But we wanted to point out that underneath all of the gloom about the short term, old weaknesses in the U.S. economy are being remedied and new strengths are being discovered.

INSKEEP: What weaknesses?

BEDDOES: Well, for too long this was an economy that relied on consumption and housing. People basically went into debt to fuel their consumption and invested in houses. That was the story from the early '80s to 2007. Then - huge bust. But a lot of the excesses of that period have been worked off. Household debt has come down really quite substantially. And at the same time, some very new strengths, I think, are becoming clear in the U.S. economy.

The export sector is very dynamic. New markets are being found, new kinds of things exported - high-value services, the app economy. And then the other big thing, of course, is the energy revolution in this country. Shale gas et al, all of that is completely revolutionizing part of the U.S. economy. And it's a strength that, you know, lots of other advanced economies haven't got.

INSKEEP: David Wessel, is this just another gradual bit of an upswing? Or is there a fundamental change here?

WESSEL: I think the important point about what Zanny said is if she and her colleagues at The Economist are right, things will be great in two or three or five years. But the next two years do not look very promising right now.

INSKEEP: Why not?

WESSEL: Because the economy is far short of full employment, yet the pace of growth is slowing and it's slowing in the rest of the world as well. So if we're not going to have growth here - China is slowing, Europe's in recession - then this great export machine is going to have difficulty finding markets into which to sell.

INSKEEP: And this is what President Obama has been relying on to pull up the U.S. economy, is the export market. You're saying actually there are signs that it's working, Zanny. But the question is how soon it really, really works.

BEDDOES: Certainly, and I think that part of that is that this transformation that we've described, we are in the process of it. It hasn't finished. The muscleman on our cover is still in training, if you will.

(LAUGHTER)

BEDDOES: It's not over yet.

INSKEEP: It's a hypothetical muscleman.

BEDDOES: And it's also a muscleman relative to the weaklings in Europe.

INSKEEP: In an earlier one of our discussions, David Wessel, you went through a few basic things that could cause the economy to turn around. Each one of them had something that was dragging them down. Are they all hitting bottom here, or are some of them still going to continue to be a drag on the economy?

WESSEL: No. Some of them will continue to be a drag. Consumer spending is still muted. People are still trying to pay down their debt, and to the extent that we have high unemployment, fewer people have money to spend. Government at the moment is more of a drag. State and local governments are cutting spending, laying off workers, and Ben Bernanke, the Fed chairman, said he was worried that the federal government would contract, raise taxes and cut spending too much at the end of the year. So the problem is that we are slowing far short of our potential.

BEDDOES: I completely agree with that, and I think that the tragedy is that this economy, which is undergoing some fundamental shifts, is, I think, being hit by some wholly avoidable shocks. Some of them are domestic - you know, the fiscal cliff, the possibility of huge tax increases and spending cuts at the end of the year. So that's a kind of avoidable mess.

INSKEEP: We should explain this for people. At the end of the year the tax cuts originally passed under President Bush are due to expire, so we're looking at a huge political fight regardless of the outcome of the November election.

WESSEL: And spending will be cut across the board unless Congress and the president find some compromise on the deficit. So you have this double whammy.

BEDDOES: So that's the one enormous avoidable mistake. The other is a foreign one, which is Europe, and I think it's undoubtedly the case that the mess in Europe, which frankly is not getting any better, is casting an enormous shadow on the world economy.

WESSEL: I think there's another issue to raise, which is, will our short-term problems prevent us from doing the things that allow most Americans to benefit from the rather upbeat view that The Economist had on its cover the other day? By which I mean, unless we are finding a better way to fix our K through 12 schools, unless we are solving the problems of inefficiency and high tuitions at the higher education level, we will not have a lot of workers who are poised to get the jobs. They'll be the good jobs in the future.

And so the concern is that short-term belt tightening and political paralysis may have long-lived effects if they prevent us from taking advantage of the opportunities in the future.

INSKEEP: Can I ask about one other point that's made in this Economist cover, Zanny Minton Beddoes? Because we are in the midst of this giant argument in the United States about the role of government in the economy, and yet your magazine argues that actually the private sector has been innovating, has been making necessary changes.

BEDDOES: Yeah. I think the American private sector is reinventing itself. There's an enormous amount of dynamism. But there's a huge amount of stuff that government needs to do and isn't doing. For example, improving education. For example, improving the possibility for skilling workers. For example, infrastructure. I think that's an important part of things in this economy. So I get quite frustrated with the debate that you often hear right now, which is that either you think you should get the government out of everything because it always messes things up, and on the other side it's all about more government. And I think the truth is that you need government, you need the right sort of government. I think we end our editorial with a whole load of things that government should focus on improving.

INSKEEP: Zanny Minton Beddoes is economics editor of The Economist. Thanks once again for coming by.

BEDDOES: Great to be here.

INSKEEP: And something you need to know about David Wessel of the Wall Street Journal. He actually was the model for that muscleman on the cover of The Economist. David, thanks again.

WESSEL: You're welcome.

INSKEEP: Get some exercise. Transcript provided by NPR, Copyright NPR.